Paragraph 1.3 of the Public Debt Management Report of the Ministry of Finance (MoF) for Q4 2016-17 is remarkably candid as it admits that the IIP registered a growth of 0.4 per cent, compared to 2.6 per cent a year ago.

Yet the Controller General of Accounts (CGA) states that gross receipts of the Government of India (GoI) rose by nearly Rs.2 lakh crore ~ Rs.12.58 lakh crore and Rs.14.40 lakh crore in 2016 and 2017 respectively. Of a Rs.19.75 lakh crore Union budget in 2016-17, interest payment took away about Rs.4.80 lakh crore, i.e. 24 per cent.

Non-Plan expenditure on revenue account took away another approximately Rs.8 lakh crore or 41 per cent. In effect about two-third of GoI’s expenditure budget for 2016-17 owed either to debt servicing or self-sustenance respectively. Only about Rs.1.85 lakh crore, less than 10 per cent of the budget, went into capital expenditure.

This figure incidentally includes construction of new offices and technical buildings, residential complexes for government personnel, major repairs to installations, and 1-5 per cent for execution agency charges, reducing the public benefit further.

Thus there are hardly any funds left from the balance 25-30 per cent for states and other consuming Ministries. The revenue deficit of Rs.5.35 crore (projected gross fiscal deficit to cross Rs.6 lakh crore according to the MoF document) is thus invariable.

Para 2.3.1 of the MoF’s report shows that GoI borrowed Rs.5.82 lakh crore in 2016-17, nominally less than in 2015-16. Para 4.1 of the same report adds that “The total Public Debt (excluding liabilities under the ‘Public Account’) of the Government provisionally decreased to Rs.6,066,312 crore at end-March 2017 from Rs.6,184,106 crore at end-December 2016”, i.e. about Rs.60 lakh crore.

The Controller General of Accounts’ online data also shows a shortfall of about Rs.41000 crore on non-tax revenues against revised estimates, probably suggestive of the failure of telecom and other auctions. Compounding this is a revenue decline of about Rs.38000 crore in 2016-17 over 2015-16. In 2017- 18 and onwards, either GoI or the states or both, will have to provide public sector banks whose farm loans were waived/awaiting waiver to provide for at least one lakh plus crore in the respective budgets.

Niti Aayog online data shows non-special category states with total outstanding liabilities in the range of 20-24 per cent of GSDP, without farm-waiver costs. However, particularly worrisome are special category states that account for a 19-46 per cent range of liabilities.

Farm-loan waivers of about one lakh crore in 2017-18 have already become inescapable with major states like Maharashtra and UP having waived about Rs.70000 crore together, while many more demands are in various stages of consideration in other states.

Unless made good by the GoI or states to the loaning banks, the public sector banking sector would sink even deeper into the red. Although the last Finance Commission (FC) recommended (that was accepted by GoI) a 10 per cent rise in the share of central taxes for states taking the total to 42 per cent, this is unlikely to benefit states that have been politically reticent about raising the per cent of their own revenues.

Non-special category states like Bihar (31.3 per cent), MP (46.20%), Jharkhand (42.50 per cent), Odisha (44.30 per cent) and West Bengal (44.70 per cent) cannot cover even half their running expenses on their own revenue. Not surprisingly, Bihar (31.3 per cent) was only nominally better placed than special category ~ Assam (32.20 per cent) in 2014-15. GNCT Delhi was the only one that generated 118.80 per cent on its own in 2014-15.

Major states like Gujarat (217.20 per cent), Karnataka (200.44 per cent), Maharashtra (309.6 per cent), Tamil Nadu (257.1 per cent), UP (284.1 per cent) reported the highest estimated gross fiscal deficit in 2014-15. Interestingly, heavily indebted states like West Bengal (152.90 per cent) and Punjab (103.70 per cent) fared far better, learning to live within their meagre means.

While granting the 42 per cent Finance Commission rise, GoI did away with several centrally-funded/aided schemes that more than nullified whatever little the states gained. With GST gains unknown, and most state levies having been subsumed in it, states like Maharashtra and Tamil Nadu are lawfully raising taxes on motor vehicles and cinema tickets, with many more to come. Obviously, One Nation One Tax (GST) did little to convince states.

Hence, GoI cannot shy away from its financial responsibilities towards its electors in states and will have to provide for them accordingly, presumably by more borrowing, till GST fully kicks in. Even if GST turns into a gold mine, for the first few years its proceeds would have to be devoted to recover high-cost debt. Defence expenditure has steadily declined from 15.24 per cent of the GoI’s budget and 2.36 per cent of GDP in 2000-01 to 12.20 per cent and 1.56 per cent respectively in 2017-18.

Although the defence budget for 2017-18 shows a nominal increase of 5.8 per cent over last year’s allocation ~ net of inflation at 5 per cent ~ the real increase is a negligible 0.8 per cent. A sum of Rs.86488.01 crore has been allocated for Capital Expenditure in 2017-18.

The Army projected an amount of Rs.42485.93 crore for Capital Budget but only Rs.25246.35 crore (60 per cent) was allocated by the Finance Ministry.

Likewise, the Navy and Air Force, which projected a requirement of Rs.27546.49 crore and Rs.62048.85 crore, have been allocated Rs.18603.71 (59 per cent) crore and Rs.33570.17 (54 per cent) crore, respectively.

The actual cash flow against such allocations is most uncertain. The Defence-cum-Finance Minister had bravely promised in the Lok Sabha in mid-March, 2017, that “Any critical requirement of the forces will not be compromised with, even if we have to cut expenditure somewhere else.”

Obviously, even he was short of ideas where such deep cuts could be made. Turning to non-defence infrastructure, Mr Arun Jaitley, speaking at the BRICS-NDB second annual meeting earlier this year, had estimated India’s needs of financing for infrastructure at anywhere up to Rs.43 trillion or $646 billion in 2017-22, i.e. an average of Rs.8-9 lakh crore per annum in the next five years or 40 per cent of the GoI’s annual budget of Rs.19.75 lakh crore in 2016-17.

Given the burgeoning debts of the private sector, primarily in distressed power projects, GoI and the states may well have to fork out 40-60 per cent of such numbers via their budget at interest rates of 7-11 per cent. If project on-streaming is delayed, as they usually are, Greece would have come home to India after a few years.

It is abundantly clear that the debt:GDP ratio is steadily worsening with the NK Singh Committee estimating it at an average of 73.2 per cent , though we are still far away from the US and UK in this regard. Revenue expenses, i.e. the cost of sustaining governments, are rising at an alarming pace.

Collectively, states and the Centre employ over two crore personnel (excluding defence services) plus an equal or larger number in innumerable autonomous bodies and other agencies, public sector (PSU) and financial institutions (FI) substantially owned by governments.

As on date, GoI has over 50 ministries and 50 departments embedded in them. These departments in turn have several other departments, autonomous bodies, PSUs, and FIs under their administrative control. The number of autonomous entities has expanded from 35 in 1955 to 533 in 2012, guzzling an estimated Rs.60000 crore per annum.

Since the basket of government funds remains stagnant in real terms and demands are endless, GOI needs to push ahead much more radically in reducing its revenue expenditure to sustain itself and reduce the Debt:GDP ratio substantially.

(To be concluded)

(The writer is a senior public policy analyst and commentator)